Barefoot Investor: Corporate News - Genting Malaysia

NFO Rumours Hit High Pitch

News of Genting Malaysia bidding for Tanjong Plc’s Pan Malaysia Pools Sdn Bhd (PMP) have resurfaced, with Star Biz reporting that the group may even sign the deal to acquire PMP at an estimated acquisition cost of RM2.5bn tomorrow. We view such an acquisition as NEUTRAL at best and have listed down three potential routes for such a transaction.

Neutral at best if acquisition materializes. If the rumor turned out to be true and Genting Malaysia succeeds in winning the bid to acquire PMP, we would view the development as NEUTRAL at best. The acquisition will not come cheap at an estimated 16x to 18x PER (RM2.3bn to RM2.5bn) for a business with low single-digit growth and the fact that the purchaser would “inherit’’ the loss-making RTO division (annual operating loss of ~RM60m). Assuming a RM2.5bn acquisition price (18x PER), 5% borrowing cost and 3% fixed deposit rate on interest income forgone, we estimate that the acquisition would only enhance Genting Malaysia’s FY11 earnings by 1%, assuming a 50:50 Debt:Equity financing structure, and only a +2.5% earnings enhancement assuming zero debt financing. The excess cash of RM2.3bn to RM2.5bn would generate far better returns and hold more growth potential if invested in high-growth regional or global casino opportunities. Even the group’s recently acquired and relatively low yielding UK casino operation commands a more superior acquisition earnings yield of 8.4% vs PMP’s 6.4% (assuming a RM2.5bn acquisition price). To compare further, the group’s Singapore integrated resort chalks up a significantly higher internal rate of return despite its high initial CAPEX.

Expanding overseas to diversify risk. Genting Malaysia has been expanding aggressively overseas and remains highly vigilant of potential casino opportunities globally. Despite the group’s robust free cash flow generation of more than RM700m p.a and existing net cash balance of RM1.2bn (after factoring in total cost of developing the Aqueduct and Miami land acquisition), we note that the group would still require to raise its gearing if and when such casino opportunities materialize. It has already indicated that it could spend close to USD3bn to develop its recently acquired land bank in Miami in Florida. As such, spending some RM2.5bn for PMP for its low single-digit growth and earnings yield certainly would not sit well with the group’s overall growth strategy.

Scenario 1:
Genting Bhd swaps power assets for PMP – Clarity on PPA renegotiation is key. There have been talk that Tanjong plc may swap its gaming assets (PMP) for Genting Bhd’s power assets (58.6% stake in 720MW Kuala Langat power plant in Malaysia; 100% stake in China’s 724MW Meizhou Wan power plant, and 30% of Lanco Kondapalli power plant in India). Such as deal makes sense as it would bring about a win-win situation for both parties, turning Genting Bhd into a pure gaming play while positioning Tanjong as a pure power player with a foothold in India via Genting’s power plant in India. However, uncertainty over the ongoing Power Purchase Agreement (PPA) renegotiations with the domestic Independent Power Producers (IPPs) remains a key stumbling block for now as nearly 60% of the value of the group’s power assets lies in its domestic power plants whose value could deteriorate significantly if Genting Sanyen did not agree to an extension of its PPAs, due to expire in 2016. We understand from our sources that there are two groups of 1st generation IPP players with differing views on the current PPA talks, with Genting Sanyen being in the group that is less agreeable to the proposed PPA extension terms and conditions.

Scenario 2:
May be better if power assets are separately listed. As shown in Figure 1 below, Genting Bhd’s combined portfolio of power assets generates stronger earnings compared to Tanjong’s PMP, even from the standpoint of operating cash flow, as Genting Bhd’s power assets generate cash in excess of RM400m vs PMP’s RM230m. As such, we believe that Genting Bhd may only consider an asset swap if Tanjong prices PMP at a relatively attractive level as the former would be foregoing a more superior portfolio of earnings and cash flow generating assets. Under such a scenario, we think that management may prefer to consider a public listing of its power assets to unlock the value of those assets as this would be more value accretive to shareholders, rather than make an asset SWAP for Tanjong’s PMP. Again, this will be subject to Genting Sanyen receiving greater clarity on its PPA renegotiation.

Earnings estimates of Genting Bhd power assets     RM'm
Genting Sanyen - Malaysia (58.6% stake)               135.4
Meizhouwan - China (100% stake)                             67.0
LancoKondapall - India (30% stake)                         35.0
                            Total                                              237.4

Earnings estimates of Tanjong's PMP               RM'm
NFO                                                                         173.2
RTO                                                                         -59.3
Net earnings of
gaming division                                                        113.9
(OSK Estimates)

Scenario 3:
Buying PMP via private consortium led by Lim Kok Thay. There have been rumors that PMP would instead be acquired by Tan Sri Lim Kok Thay’s (LKT) in his private capacity (as a major shareholder of Genting Group) as the bid may involve allocating a certain portion of profits from PMP to charitable causes, which may further depress yields. This would certainly be viewed negatively if Genting Malaysia or Genting Bhd were to be used as the vehicle to acquire PMP.
(Source: OSK Investment Research)


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